CAN GDP GROWTH LINK INSTRUMENT BE USED FOR ISLAMIC MONETARY POLICY?

  • Md Akther Uddin University of Creative Technology, Chittagong
  • Md Hakim Ali Taylor's University, Subang Jaya,
  • Maha Radwan University of Turin, Italy.
Keywords: Real Economy, Islamic Monetary Policy, Real Interest Rate, GDP Growth Rate, Inflation, Real Exchange Rate, Gross Savings

Abstract

In this paper, we investigate Islamic monetary policy and proposes an alternative monetary policy instrument, namely gross domestic products (GDP) growth link instrument. The modeling techniques applied are ordinary least square (OLS) and the method is applied to a dataset of 99 countries for the year 2012 and time series data for Malaysia over the period of 1983-2013. Moreover, six months (January – June 2014) daily data on Islamic and conventional interbank rates are used for the correlational study. The results tend to show that GDP growth rate adjusted for interest income and inflation can be set as a benchmark for money market instruments and reference rate for financial and capital market to set the cost of capital or rate of return. Also, we found that real interest rate is mostly not representative across 99 countries as most of the time policy rates are either determined in the money market which is usually disintegrated with the real sector of an economy, or it is fixed by the Central Bank. Islamic and conventional money market rates are found significantly correlated in the presence of dual banking system. Moreover, inflation and employment rate in the Organisation of Islamic Cooperation (OIC) countries are found higher than non-OIC countries.  Therefore, the interest rate should be replaced with more representative policy rate like the GDP growth rate linked instrument which could provide a benchmark rate for pricing products in Islamic commercial banking, and an avenue for investment in the Islamic financial market.

Author Biographies

Md Akther Uddin, University of Creative Technology, Chittagong
Assistant Professor, School of Business,
Md Hakim Ali, Taylor's University, Subang Jaya,
Research Associate and PhD Candidate, Taylor's Business School,

References

Ahmad, A.U.F., & Hassan, M.K. (2007). Riba and Islamic banking. Journal of Islamic Economics, Banking and Finance, 3(1), 1-33.

Ali, M. H., Rosly, S. A., Radwan, M., & Secinaro, S. (2019). An Examination of Factors Affecting Excess Liquidity, Evidence from Islamic Banks in Malaysia. In The Future of Risk Management, Volume II (pp. 259-275). Palgrave Macmillan, Cham.

Anwar, M. (1987). Modelling Interest-Free Economy: A Study in Macroeconomics and Development: IIIT.

Askari, H., & Rehman, S. (2013). A survey of the economic development of OIC countries. Economic development and Islamic finance, 299.

Bacha, O. I. (2008). The Islamic inter bank money market and a dual banking system: the Malaysian experience. International Journal of Islamic and Middle Eastern Finance and Management, 1(3), 210-226.

Bacha, O. I., & Mirakhor, A. (2013). Islamic Capital Markets and Development. Economic Development and Islamic Finance.

Basu, R., Prasad, A., & Rodriguez, S. L. (2015). Monetary Operations and Islamic Banking in the GCC: Challenges and Options (No. 15/234). International Monetary Fund.

Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance, 37(2), 433-447.

Biancone, P. P., & Radwan, M. (2018). Social finance and unconventional financing alternatives: an overview. European Journal of Islamic Finance, (10).

Biancone, P. P., & Radwan, M. (2018). Sharia-Compliant financing for public utility infrastructure. Utilities Policy, 52, 88-94.

Biancone, P. P., & Radwan, M. (2019). Social finance and financing social enterprises: an Islamic finance prospective. European Journal of Islamic Finance.

Biancone, P., & Secinaro, S. (2016). The equity crowdfunding Italy: a model sharia compliant. European Journal of Islamic Finance, 5, 1-10.

Cevik, S., & Charap, J. ( 2011). The behavior of conventional and Islamic bank deposit returns in Malaysia and Turkey. IMF Working Papers, 1-23.

Chapra, M.U. (1996). Monetary Management in an Islamic Economy‖, Islamic Economic Studies, 4(1), December, 1–35.

Chapra, M.U. (1985), Towards a Just Monetary System, The Islamic Foundation, UK.

Chapra, M.U. (2011). The global financial crisis: can Islamic finance help?. In Islamic Economics and Finance, 135-142. Palgrave Macmillan UK.

Choudhry, N.N., & Mirakhor, A. (1997). Indirect instruments of monetary control in an Islamic Financial system. Islamic Economic Studies, 4(2), 27-66.

Darrat, A.F. (1988). The Islamic interest-free banking system: Some empirical evidence. Applied Economics, 20, 417−425.

Friedman, M. (1968). The Role of Monetary Policy, American Economic Review LVIII, 1- 17.

Hanif M.N., Shaikh S. (2010). Central banking and monetary management in Islamic finance environment. J. Ind. Stud. Res., 8(2).

Hussain, M.M., Shahmoradi, A., & Turk, R. (2015). An Overview of Islamic Finance, 15-120. International Monetary Fund.

Kammer, M.A., Norat, M.M., Pinon, M.M., Prasad, A., Towe, M.C.M., & Zeidane, M.Z. (2015). Islamic Finance: Opportunities, Challenges, and Policy Options, 15. International Monetary Fund.

Kayed, R.N., & Hassan, M.K. (2011). The global financial crisis and Islamic finance. Thunderbird International Business Review, 53(5), 551-564.

Khan, M. A. (2004). Elimination of Interest: A Proposed Strategy. Renaissance. 14, 1.

Khan, M.S., & Mirakhor, A. (1994). Monetary management in an Islamic economy. Islamic Economics, 6(1), 3-22.

Khan, M.S., & Mirakhor, A. (1989). The financial system and monetary policy in an Islamic economy. Journal of King Abdulaziz University: Islamic Economics, 1(1), 39-57.

Khan, M.S., & Mirakhor, A. (1994). Monetary management in an Islamic economy. Islamic Economics, 6 (1), 3-22.

Khan, M.F. (1996). A Simple Model of Income Determination, Growth and Economic Development in the Perspective of an Interest-Free Economy, in M.A. Mannan (ed.), Financing Development in Islam (Jeddah: IRTI, IDB), 79-108.

Khatat, M.H., 2016. Monetary Policy in the Presence of Islamic Banking. IMF Working Papers 16 (7)2, 1-41.

Piketty, T. (2014). Capital in the Twenty-first Century. Harvard University Press.

Shaikh, S.A., & Hanif, N. (2009). Role and Functions of Central Bank in Islamic Finance. J. Ind. Stud. Res., Also available at SSRN: http://ssrn. com/abstract, 1709368.

Sukmana, R., & Kassim, S.H. (2010). Roles of the Islamic banks in the monetary transmission process in Malaysia. International Journal of Islamic and Middle Eastern Finance and Management, 3(1), 7-19.

Usmani, M.T. (2003). “Islam Aur Jadid Maeeshat-o-TIjaraht”. Karachi: Maktaba Ma’ariful Quran.

Wallace, N. and Sargent, T.J. (1976). Rational Expectations and the Theory of Monetary Policy, Journal of Monetary Economics, 2: 169-183.

Zaheer, S., Ongena, S., & Van Wijnbergen, S., 2012. The transmission of monetary policy through conventional and Islamic banks. European Banking Center Discussion Paper, (2011-018), 2011-078.

Zaher, T. S., & Kabir Hassan, M. (2001). A comparative literature survey of Islamic finance and banking. Financial Markets, Institutions & Instruments, 10(4), 155-199.

Zangeneh, H., & Salam, A. (1993). Central banking in an interest-free banking system. Islamic Economics, 5(1), 25-35.

Published
2019-08-29